Keep an Eye on China’s Economy

Wednesday, February 2nd, 2011 and is filed under Blog, News

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Knowing that China holds a good chunk of the United State’s debt, I keep an eye on China’s economy and currency. The NYT story from yesterday is a fascinating read on Beijing’s attempt to fight inflation by raising interest rates.

From the story:

“Much of China’s inflation is being fueled by the extraordinary growth in its money supply, broadly measured as so-called M2, which has soared a total of nearly 53 percent in the last two years. That is largely a result of the country’s aggressive monetary and fiscal stimulus program in 2009 and early 2010, as Beijing essentially printed money in response to the global financial crisis.

Although China’s economy is a little less than half that of the United States, its money supply is now one-quarter larger than America’s.

Since the beginning of last year, Beijing has moved several times to start clamping back down on the money in circulation, by increasing the required amounts that banks must hold in reserve, leaving them with less money to lend. The central bank has raised this requirement seven times in the last 13 months, with four of those increases coming in quick succession since mid-November.”

And later, discussing the link between the renminbi and the dollar:

“One policy change Beijing is unlikely to take soon is letting the currency, the renminbi, appreciate faster as a way to fight inflation, the economists and bankers said.

The renminbi has already been rising at an annualized rate of 5.7 percent against the dollar since China broke the currency’s peg to the dollar last June. China’s central bank continues to intervene heavily in currency markets to brake the renminbi’s rise, but not enough to stop the renminbi from rising altogether — as it did for almost two years before last June.

The Obama administration, arguing that an artificially low renminbi gave Chinese exporters an unfair price advantage over Western companies, pushed China hard a year ago to break the link to the dollar. But Washington has been slightly less vocal on the subject more recently. It barely came up in public comments by either side after President Hu Jintao of China’s recent state visit to the White House.”